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The SIFMA Podcast: Digitization, Hyper-Personalization and Self-Directed Investing

Key Trends in Wealth Management: A Conversation with Ken Bentsen and Sabrina Bailey

In this episode of the SIFMA Podcast, SIFMA President & CEO Kenneth E. Bentsen, Jr. sits down with Sabrina Bailey, Global Head of Investment & Wealth Solutions, Data & Analytics Division from LSEG (London Stock Exchange Group) to discuss three key trends in wealth management – digitization, hyper-personalization, and self-directed investing.

The SIFMA Podcast - A Conversation with LSEG's Sabrina Bailey

Transcript

Ken Bentsen: Welcome to this episode of The SIFMA Podcast. I’m Ken Bentsen, president and CEO of SIFMA and your host. The financial markets and wealth in the wealth management industry are undergoing a paradigm shift as the face of the retail investor likewise evolves.

Today, I’m joined by Sabrina Bailey global head of investment and wealth management at Refinitiv, a London stock exchange group business. Refinitiv is one of the world’s largest providers of financial markets data and infrastructure. With over 40,000 customers and 400,000 in users across 190 countries, Refinitiv powers participants across the global financial marketplace.

With this rich background of market leading data enhance digital tools and actional insights, Sabrina is uniquely positioned to talk out the three key shifts and wealth management they are being driven by data and analytics to diabatization hyper-personalization and self-directed investing so with that Sabrina thank you for joining us today.

Sabrina Bailey: Thank you, Ken, happy to be here.

Ken Bentsen: Why don’t we go ahead and dive in. So maybe start off talking about digitization. Digital innovation offers advisors a chance to differentiate themselves in a highly competitive environment. It’s important to remember that technology enhances and improves the client experience, but it doesn’t necessarily replace the human touch. So Sabrina, how can wealth managers enhance the mobile experience and is there still a place for face-to-face meetings?

Sabrina Bailey: Yes, from an enhancement perspective, it’s really about going mobile when we think about those enhancements and enhancing the mobile experience means serving the right information in a way that’s easy to digest quickly on the smaller screen of a mobile. In fact, in our 2022 wealth survey, we found that 75% of investors want to engage on a mobile device. Importantly though, in terms of face-to-face meetings, we also found that almost 50% of investors still expect they will have face-to-face meetings with our advisors. This is really important because it’s going to be that combination of mobile experience and a face-to-face experience that really drives the breadth and depth of the advisor and the investor relationship going forward.

Ken Bentsen: So, the importance of social media varies across different investor demographics, how important is it for wealth managers to invest in their social media presence?

Sabrina Bailey: It’s a great question, my daughters who are 18 and 20 talk about this all the time because their question is why aren’t wealth managers on TikTok? Great question, there are a lot of regulatory challenges associated with being on social media. So the way we think about social media is really a focus on just primary general education. There is still a need for financial education in the market and wealth management firms have the ability and the foundation to provide that education.

Then, really looking towards brand awareness from a social media standpoint and focusing in those two areas versus direct advice. Given the regulatory environment given the need for that education, we actually don’t see social media as a means for investment advice any time in the near future.

Ken Bentsen: It’s a good point and it’s many of the important rules and investor protection really were written before the advent of social media as we know it today, and something that the regulators are having to play catch up with the industry.

Investors today as we know, are look for holistic wealth solutions and a simplified view of their financial portfolio, what is the future of the investor platform experience and what should firms and investors alike consider when considering aggregating data from other sources?

Sabrina Bailey: As we look at the, what we’ll call holistic wealth solutions, we are seeing a trend in the market where investors are looking to see all their information in one place. What’s important is how that information is served up. I think about buying something like life insurance for example, and while I’ve spent my life in the investment industry, when I got all the information on life insurance it is holy complex to me because it’s not a place I live and breathe every day. It’s very much the same for investors. So being able to engage with them in a way they understand what you’re in is going to be really important.

In addition, the quality of data is key. When we think about that aggregation of assets, the quality of data becomes critical because the data that goes into that advice feeds back to that investor, if it is not high quality will give the wrong directional information to the investors in terms of how to manage their portfolio.

Then I’d say finally, really looking to build client-centric portfolios, meaning that advisors both through digital means as well as in-person means, will need to continue to understand what’s really important to their end investor in terms of areas of focus what things will differentiate them. So do they have kids that are moving into college, how do they think about sustainable investing? Which, everybody describes a bit differently, everybody has a different leaning towards and really being able to take those components and customize it.

The best example I can give, because I’m a big story teller, is our daughters were purchasing shampoo about a year ago and they were paying twice as much as you would pay in any market  and their point was it’s customized for me and I said what do you mean by customized? They said they answer 10 questions about their hair type and then they get to pick a color and it’s customized and so they’ve got to have hundreds of kinds of shampoos. I said you do realize right that there’s probably three different types of shampoo and the customization is just you answering question. So they are willing to pay more for that, I think that’s important because they felt like the company knew them. As an investment industry, we’ve got to get better at getting to know our customers, and we still have ways to go from that perspective.

Ken Bentsen: That’s a great example of the younger generation and their use of technology for virtually every everyday activities and that sometimes I have a hard time figuring out, but they’ve really created certain efficiencies that we may not see in some instances, but it does show how do you communicate and what they’re going to be looking for. I think your point is that in the wealth management business, that’s the next generation we’re gonna have to figure out how you communicate with. You can’t communicate the same way over the telephone or through the mail or whatever it may be.

Sabrina Bailey: Then just making sure that communication is secure too. As we all know across the entire financial industry, cybersecurity risk is here actually across every industry so, just understanding how to create those interactions in a very safe way as well from a technology engagement perspective will be critical to the industry going forward. It’s where we see a lot of firms making investments today, in terms of how to build that direct and secure channel.

Ken Bentsen: Right, that’s something we at SIFMA over the years, particularly around data aggregation, have worked with our members and trying to come up with best practices and then working across the industry with other trades and participants so that at the end of the day to your point, the end investor themselves knows that their data is protected through use of these tools.

Let’s maybe switch a trend to hyper-personalization. You kind of got into that with the shampoo story a little bit but, historically some would argue the personalized experience was limited to the number of clients that a wealth manager could serve. However, technologies clearly open the door and on the personalization scale created, more efficiencies. What are some of the ways that wealth managers are successfully introducing personalization?

Sabrina Bailey: One way and we’ve seen this I would argue over the last five-plus years almost a decade is just the understanding of what the end investor goals are. It’s an easy way to hyper-personalize if you start asking about that. Some of the more innovative ways that we’re seeing wealth managers truly understand and hyper-personalized is asking investors about when they want to hear from them.

For example, do you want to hear from me in a market downturn, are you comfortable, at what level are you comfortable not hearing from me, and being able to aggregate that and deploy it in a way so that advisors can see immediately which customers they should call if the market moves by 5% for example. The other thing we’re seeing is actually wealth management firms looking at how to use the data they have in terms of that investor engagement to understand not only what investors say they want but, how they’re really reacting in the different market environments which can trigger a move for an advisor to directly call.

So again, it’s about taking the data you have about investors and pulling in additional data than being able to collate it and serve it in a way to advisors that they can spend their time on the highest value add conversation at that point in time and what those wealth management firms have seen is actually different people want to engage at different points and times. There are some periods where investors are in a stage of their life where there’s not a change and the portfolios meant to do just what it’s meant to do which is grow their assets over time so there’s relatively little an inner engagement but then a new job change comes up, and very quickly no engagement turns into a significant amount of engagement as they’re thinking about what does the new compensation mean, am I moving what are the different tax implications, et cetera. So, really getting to know those key points in time as an industry but doing so in an automated way is where we see hyper-personalization moving.

Ken Bentsen: A key consideration for all investors when selecting a wealth manager is the cost. Which investors do you see are considering personalization as a cost worth incurring?

Sabrina Bailey: This is millennials. In fact, given the shampoo example in our survey in 2022, 64% of millennials said they’re willing to pay more for personalized advice. That’s an interesting shift as we look at the wealth management space. We would argue in some cases not at all but in some cases fees have moved too far potentially in the wrong direction to provide service in the way individuals need it in the education they need in the wealth management space, and so having the ability to differentiate fees based on personalized service will be a critical component of how wealth managers should think about the market as they fast forward.

We also found actually that those that were moving into retirement were willing to pay slightly more for advice, because their needs are more complex, they’re looking for security of their portfolio, and they’re I want that personalization in terms of an advisor walking them through how that asset withdrawal will look like. Then you’ve got the group in the middle that was pretty agnostic on paying on higher than lower fees. Interestingly there, about 50% said they’d pay more in fees if the values of the firm aligned with their personal values, which is not what we expected to see.

We expected the top concern or the top area that that generation or that group of people would look at a performance of a portfolio and that actually didn’t come up at all in the top four areas that people were willing to pay more for it was ethical business practices, vision and integrity, the approach to inclusion, and social purpose are the top for reasons that those groups in between those who are looking for retirement and those that are coming into investing will pay or for that personalized advice.

Ken Bentsen: Yeah, that’s really interesting. That does appear to be a shift. So, let’s move to trend three self-directed investing. How is the mix of self-directed and advisor investing changed over time, when you think about it when it comes to inner generational wealth transfer, we see less active investment by second and third generations but, what are we seeing happening at this point

Sabrina Bailey: We’ve absolutely seen a trend of increasing self-directed investors over the last, let’s call it 15 years and that trend coincided with a couple of things. One was the reboot of the market post the global financial crisis, the second was the ease of which data could be accessed. When we really look at the fintech revolution most of the thin text that we’re offering self-directed in a new way came out roughly about that time and we this acceleration. So, in fact actually one in every five Americans has their own self-directed account now the trading in those accounts. However, we look at where we stand today varies based on the market environment and we also find that those that are nearing or into their next phase of life or retirement are less likely to have a self-directed account than those that are younger or newer in their career.

What we are finding and, actually we heard a great speaker few months back that talked about the fact that most self-directed investors have a pool of money they know they can take risk with and they’re willing to take that risk. So we haven’t seen much in the way of changes in terms of number of accounts – what we are seeing is those as that pool of assets grow or as life becomes more complex with families or careers or houses et cetera that pool starts to shift into a self-directed bucket still where people can make their investments and advised portion of the portfolio which is really for that stability for the future and that’s where we see advice self-directed truly coming together. When we look at next gen in terms of second and third generation correct, they’re less active they also want some portion that they can control and personalized on their own, and we find that oftentimes they want the same wealth management organization to be able to support the fact that they’ve got a self-directed portfolio and they have an advised portfolio so there’s a natural transition.

It hasn’t been until really the pandemic that saw wealth management firm start to recognize self-directed not as a competing product but complementary to the pool of assets individuals will have similar to a 401K and actually it remains a pretty small part of the portfolio. So really working with wealth management firms to digitize and understand that self-directed becomes a part of that overall evolution of an investment portfolio over time.

Ken Bentsen: That’s interesting because if you think about sort of the original self-directed firms they went the other direction right, where they built out advisory business and having started and now you’re seeing this incumbent advisories going the other direction and recognizing the need for that sort of hybrid market place.

Talking about the younger generations are you know looking at that self-directed and wanting to be active and putting their money to work, the industry is act you know active in many areas for instance in things like unlocking the power of carbon markets to reach global net zero. Are investors growing more willing to consider ESG investments and what happens with future decisions when wealth managers fill investing-related knowledge gaps with more concrete data and research?

Sabrina Bailey: We have absolutely undisputedly seen the rise of sustainable investing or investing in environmental social and governance causes across the board over the last decade. The industry is almost doubled in terms of assets under management. Where it’s important and this comes back to the hyper-personalization piece again is the definition of sustainable investing and the way I think about it is I grew up in a small lodging community in Oregon. If you asked me to invest in something that went against the logging industry or the paper mills, I absolutely wouldn’t do it because that’s what put food on our family’s table and the tape of most of the people who lived in our small town. But if you asked me to invest in other areas such as gender equality, I would have absolutely invested there so it’s going to be really important that advisors understand the value of their investors and then can tie sustainable investing directly to those values.

I’m also going to say though that reporting is going to be critical and over the next five years hopefully no more than that but potentially a decade, having global standards for companies reporting in these areas will continue to become more important because with those global standards, you get consistency of data and you can really make the decisions about where and how you want to invest. For example, some of the biggest oil companies also spend the most on green energy research, how do you then distinguish between an oil company and a green company and how do you bring that together in a way investors understand and advisors understand how those portfolios are built so there’s still a lot of questions to be answered but I’d say we see that market picking up.

Third comment is where there’s a regulatory mandate for things like sustainable investing climate change we see growth happening much faster there in places like Europe than we do in some of the our countries around the globe where there’s less regulation that’s really helping build up that demand.

Ken Bentsen: I’m well aware of Refinitiv’s work and looking at data around sustainability and definitely a leader in that in that area. Are you in terms of demand for ESG or sustainable investments, you said you’re seeing that across the board are you seeing that, in your data, are you seeing that across board whether it’s a self-directed or advised account?

Sabrina Bailey: Yes, and we see greater demand and self-directed than advised. In part because as we look at the wealth management industry data coming in about ESG is relatively new to the industry and getting the advisors educated on that data. Specifically, though in both areas, we actually see the growth tilted towards what I’ll call thematic portfolios. So we’re seeing a lot of growth in climate portfolios. For example, social bond portfolios and I would argue lower growth and just your general ESG broad spectrum that in part again is back to the data we can have the best data but without the corporate responsibility to report on all that data then it makes it more challenging.

The other area we see growth and especially in self-directed, is providing data that’s relative data on the ESG. So, I have two portfolios and those two portfolios one has an ESG score of a four out of ten and one has a six out of ten but, the performance and the risk are roughly equal overtime. We are finding that when presented with that data self-directed investors will actually purchase the ESG higher-rated ESG portfolio based on the data shown to them, because they can achieve the same risk reward while doing good at the same time. As an industry, we’re really working on making sure that the data is there so that wealth advisors and investors can have that data to truly make the decisions that aren’t binary but that are inclusive of ESG in part of your investing portfolio.

Ken Bentsen: I think that’s very interesting, when we’ve had different conferences particularly with advisors, they talk about customer demand but also you know how to model products for that. Just to sort of close out, two things we’ve seen incredible periods of volatility over the last couple of years that let’s come down from the peak if you go back to obviously the onset of the pandemic in March where the VICs really blew through the roof and huge volumes and volatility, we had a little bit of that in 2022 but it’s certainly tapered off looking at our data. What has your data shown with respect to particularly self-directed investing as volatility is on now it’s off, you said there’s still you haven’t seen a draw often accounts but have you seen it drop off in activity?

Sabrina Bailey: We’ve seen three things. We’ve seen a stabilization of number accounts in terms of self-directed so we have not in a drop off, we’ve seen slower account openings for self-directed accounts in the industry and lower trading volumes in times of high volatility. We don’t have the data to say why we’re seeing that lower trading we can all speculate on the fact that we may be seeing lower trading because folks are holding on to securities longer given the market downturn to try to recoup losses but, we don’t have that data yet it’s still to come.

I would say that what we’re finding as well as we are seeing with self-directed investors who now know what their tolerance for loss is, a review of what the does that portfolio look like and from a wealth management side advisors are having more inbound calls about potentially advised portfolios. So we are again not that they want to close that self-directed portfolio but, they are looking at what portion of assets do I move into advised if I’m out of stage in my life where it’s become more complex and I really want that security of an advised portfolio alongside my self-directed portfolio.

Ken Bentsen: Yeah, that’s a great point and underscores the importance having the relationship with an advisor given your circumstance. Last question, what would you say investors consider their number one source for investment information?

Sabrina Bailey: It’s a great question and one that we thought a lot about. So our 2022 survey actually said 58% of investors and we surveyed thousands of investors rely on advisor led advice whether that’s through media channels are directly with the advisor, 60% consider that the most reliable source of information which is really interesting. So, investors are looking towards advice firms and large asset management firms for that investment direction. Below that, it was public news so you can think about all that they see on their self-directed broker jap it’s really news in market sentiment plus advice that they’re seeing coming through the market publicly from advisors and institutional investors that are driving how they’re investing their portfolios, which gives a great actual pathway from self-directed into that advice portfolios we were just discussing.

Ken Bentsen: Well Sabrina, that’s all we have time for today I want to thank you very much for spending some time with us and for sharing the Refinitiv data again Refinitiv’s a wealth of information and you all are always on top of so many things it’s really interesting and for more information on SIFMA as well as financial markets and the role of financial advisors and investing, please visit www.sifma.org and again Sabrina, thank you very much for being with us today.

Sabrina Bailey: Thank you very much.

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Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. Mr. Bentsen is also Chair of the International Council of Securities Associations (ICSA).

 

 

Sabrina Bailey is the Global Head of Investment & Wealth Solutions, Data & Analytics Division, LSEG.

 

 

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